By Swann Collins, investor, writer and consultant in international affairs – Eurasia Business News, May 4, 2022

The U.S. Federal Reserve Bank started to tighten its expansive monetary policy last March. Now, the central bank continues the move.

In a rare move, the U.S. Federal Reserve approved today a 0.50% interest rate increase and announced plans to shrink its $9 trillion asset portfolio starting next month, in an effort to tackle a 8.5% inflation in annual terms, a record since January 1982.

On March 16, amid annual inflation in February hitting 7.9%, the Federal Reserve had already approved a 0.25 percentage point rate hike, the first increase since December 2018. This move brought the federal funds rate into a range of 0.25%-0.5%.[1] Such an increase correspond with a hike in the prime rate and immediately send financing costs higher for many forms of consumer borrowing and credit.

The moves, announced after a two-day policy meeting of central bankers Wednesday, will raise the Fed’s benchmark federal-funds rate to a target range between 0.75% and 1%.

The Fed Chairman Jerome Powell stated :

“With appropriate firming in the stance of monetary policy, the Committee expects inflation to return to its 2 percent objective and the labor market to remain strong. In support of these goals, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent and anticipates that ongoing increases in the target range will be appropriate.”

The U.S. regulator pointed to necessity of further tightening its monetary policy. Jerome Powell, calling inflation in the U.S. “too high”, before denying its lasting character in Autumn 2021, said that the possibility of an equally significant rate hike will be considered at the next two meetings. It was also announced that on June 1, the reduction of assets on the Fed’s balance sheet, “inflated” during the easing period, will begin – within three months.

As of today, the Fed’s balance sheet stands at $8.2 trillion. Three-quarters of that increase, or $3 trillion, was created over a period of about 12 weeks last year.

In his official statement, Jerome Powell added that :

“Although overall economic activity edged down in the first quarter, household spending and business fixed investment remained strong. Job gains have been robust in recent months, and the unemployment rate has declined substantially. Inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher energy prices, and broader price pressures.”

The Federal Open Market Committee also decided to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities on June 1, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in conjunction with this statement.

By raising its rates, the Fed forces the banks to increase the rates they offer to their customers for the financing of a house, a car or any consumer good.

Fed officials announced that the rate increases will come with slower economic growth this year. The Federal Open Market Committee also projected roughly more rate hikes in 2022, along with slower growth and higher inflation.

It seems that the massive quantitative easing and the asset purchase program carried out by the Federal Reserve since 2008 have caused out-of-control inflation and that U.S. central bankers now fear the burst of the real estate and stocks bubbles they have created.

Read also : How to invest in gold

Since the start of the coronavirus crisis in February-March 2020, the Fed has injected the markets with 120 billion US dollars in liquidity each month, through the purchase of 80 billion treasury bills and 40 billion MBS. To briefly say it, the Fed has printed 120 billion of US dollars each month for more than 18 months. High inflation is a logical consequence.

To protect their purchasing power, investors and workers should now buy gold, silver and defensive stock. If not, politicians and central bankers will not save them and they will lose a lot in the coming financial crisis.

Read more about gold and inflation with Gold : Build Your Wealth and Freedom

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© Copyright 2022 – Swann Collins, investor and consultant in international affairs.